Get ready for the end of the low-cost trend that brought us cheap flights. As airlines sink deeper in debt because of the coronavirus pandemic, they will be unable to avoid raising fares after the crisis. Forget about €10 flights from Tel Aviv to Budapest.
In the nightmare scenario for the future of the civil aviation industry published this week by the CAPA Center for Aviation, the crisis will cause most of the world's airlines to fold, unless a fairy godmother comes to their aid, i.e. governments. According to the CAPA report, most airlines will not survive the catastrophe of the paralysis afflicting aviation in most of its markets.
The Italian government has nationalized Alitalia in order to save it. Alitalia, which was on the verge of shutting down long before the crisis, received a bridging loan from the government.
Airlines all over the world are calling for immediate action to improve their cash flow, through tax cuts or loans and monetary grants. Since it is clear that the civil aviation industry is not the only sufferer in the crisis, however, it is clear to the airlines that governments' priorities have changed.
In addition to Italy, US President Donald Trump has also stated that he plans to help US airlines, saying "We're going to back the airlines 100% - it's not their fault." US airlines are asking the government for $50 billion in aid. The US aviation market is the most profitable in the world, especially internal US passenger traffic in normal times.
The CAPA report explains that the airlines' problems are not confined to the dramatic drop-off in demand for flights; they are also being affected by more and more countries closing their gates to global aviation, including a US ban on flights from Europe. In addition to Israel, among the countries that have already banned entry of foreigners are Canada, Poland, Jordan, Russia, and Georgia and Australia and New Zealand are set to follow. Airlines in most of these countries are discontinuing their flights.
In such a situation, the report says, in addition to canceling their flights, airlines are unable to sell tickets for the future. As if that were not enough, airlines are receiving thousands of ticket cancellations and must refund the passengers' money, depending on the laws in each country.
This highlights the airlines' problem - dwindling cash flow combined with the liabilities and loans that they juggle as a matter of course.
"Demand for flights has disappeared"
Ryanair announced this week that while there was a real possibility that it would have to ground its entire fleet of 450 aircraft, its €4 billion cash flow would enable it to survive. This is not the case with other airlines.
At a (virtual) press conference held by the International Air Transport Association (IATA), Brian Pearce, the organization's chief economist, said that most airlines did not have enough money to survive for more than three months. "The crisis is getting worse, and is afflicting the vast majority of the world's airlines. Outside of the 30 largest airlines, which can survive longer, there is a deepening liquidity crisis.
"The main problem is no longer that people are afraid to fly; it's that borders are being closed. The demand for flights has disappeared. On March 5, we estimated the damage to the industry at $113 billion, which we thought at the time was the worst-case scenario. It's clear to us that this amount has greatly increased."
Pearce emphasized the liquidity problem afflicting 75% of the airlines. "Even before the coronavirus crisis, these airlines began 2020 with a cash balance enabling them to survive for two months. Now, with this substantial drop-off in activity, they will be unable to survive without immediate government support." Pearce also commented on the decline in air cargoes, which began last year with the trade war between the US and China, "and which is getting worse now," and which is also having a negative impact on the airlines' revenue.
It is definite that after the crisis passes, the global civil aviation industry will be completely different from what it has been up until now. The prediction that some airlines will not survive is quite reasonable. The question is which will be the first to declare bankruptcy (after UK low-cost airline Flybe, which was in trouble before the crisis, closed its doors when the crisis hit).
Even if not many airlines go under, most of the survivors will be in desperate straits, and the competition laws will therefore also be changed. Companies like Ryanair will not be able to continue selling tickets for €10, €20, or even €50. Furthermore, Ryanair will not have to compete with a company that can afford to offer bargain basement prices, because no company will be able to afford it.
It will take the civil aviation industry many months after the virus passes to recover, and some believe that recovery will take a year. The battered airlines will not resume their full schedules and timetables. Their staff will be smaller (following mass layoffs), and the resumption of their activity will be gradual and hesitant. The civil aviation sector, which was prosperous before the crisis, will revert to what it was many years ago, both in the size of companies and the extent of passenger traffic.
The increase in the frequency of leisure flights will come to a stop with the loss of disposable income among the public, which has been put on unpaid leave at best and fired at worst, and which will also have to rebuild their household economies. Vacations can wait. The business sector will also have to recover. Business passengers have already discovered the option of holding work meetings with overseas colleagues by screen. Companies will also have to recover from the crisis, and will undoubtedly cut back on travel by employees. Civil aviation will face pressure from every direction.
Travel agents' window of opportunity
When the crisis ends, the language of prices in civil aviation will go back to what it was years ago, even to the years when we paid $400 and $500 for a flight to Europe. For example, if El Al Airlines gets the NIS 700 million state loan it wants (in return for a large-scale cost-cutting program), together with its liabilities from the airlines it recently procured, it will be unable to avoid rolling the cost of its loan payments onto the consumer through fares. This mathematics will be applied all over the world.
Who will be in a position to profit? The collapse of civil aviation and tourism has also hit the travel agents, who have seen their activity disappear instantly. Actually, most of their activity consists of responding to flight cancellations, battling against airlines refusing to refund passengers for canceled flights, and pleading with other suppliers. They may wind up profiting, however.
One passenger who ordered a flight before the crisis, has learned a lesson. "I ordered a flight from some unknown airline in Spain that I found on the Internet. Now, when I have to get a refund for the flight, which was canceled, I'm getting bumped from one place to another, and I can't get any response or my money back. I know that when the virus is finished, I'll order a flight only from a regular and responsible travel agent, who will take care of me in such cases. I learned my lesson," he said. It is very possible that this passenger's experience will be of some comfort to the battered travel agent sector in its battle for survival.
Published by Globes, Israel business news - en.globes.co.il - on March 19, 2020
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